PEO vs. EOR: Which Is Right for Your Business?

Businesses seeking guidance and assistance with human resource administration have many types of providers to choose from. A Professional Employer Organization (PEO) and Employer of Record (EOR) services are two of them. These third-party service providers offer important human resources services, with some overlapping responsibilities and significant differences.

Business owners have a lot on their plates, so it may seem at times that the design and implementation of HR solutions and benefits packages are too much to deal with. Fortunately, third-party HR services providers can help with many administrative functions (payroll, benefits, workers' compensation, etc.) so that CEOs and their human resources departments can focus on more strategic goals and initiatives.

PEOs and EORs are designed to offer help in these areas. Still, it may be helpful to understand EOR vs. PEO services and what they can do for your small business.

What Is a Professional Employer Organization (PEO)?

A professional employer organization (PEO) supports many administrative functions like HR, payroll, benefits, risk management, and compliance. Through a co-employment relationship where the client and the PEO enter into a service agreement to establish responsibilities, the PEO can provide access to benefits and workers’ compensation coverage.

When working with a PEO, you, the client, maintain control of your business operations and decision-making, including employee supervision and staffing decisions. The PEO assists with certain HR administrative tasks such as administering benefits, processing payroll and tax reporting, helping maintain compliance, and improving workplace safety. This helps to ease the burden of traditional HR responsibilities, so you can focus on running your business.

What Is an Employer of Record (EOR)?

An employer of record organization manages employees for a business client. EORs generally assume responsibility for all facets of employment, such as payroll, benefits, taxes, and compliance.

EORs are useful when a business entity is needed in a foreign country to expand hiring. An EOR assumes responsibility for recruiting and hiring employees under their own legal entity to work for their client's business.

Areas of assistance offered by EORs include:

• Help with immigration issues
• International employee onboarding and termination
• Compliance with a foreign country's employment regulations
• Benefits reporting

What Is the Difference Between a PEO and an EOR?

As noted, there are similarities and significant distinctions between an employer of record vs. professional employer organization model. When working with a PEO, a business retains legal responsibility for its employees and maintains control of business operations and decision-making, including employee supervision and staffing decisions, while the PEO provides support for administrative functions such as payroll, benefits, and other related functions.

By contrast, an EOR is the legal employer for anyone hired through this third-party organization to work for the client company. New hires are employed by the EOR, not with a client employer. The EOR is equipped with a thorough understanding of the local landscape in the foreign country for recruiting and relevant employment laws. This can facilitate a business's expansion into multinational status.

Here are other areas that illustrate both the differences and similarities of an employer of record vs. PEO:

Business Structure

When working with a PEO, you outsource certain administrative HR responsibilities to a trusted third party. You retain responsibility for your company’s overall HR-related strategy.

Working with an EOR, you relinquish some control and responsibility over HR duties, trusting the third party's experience and knowledge of HR in a foreign setting.

Responsibilities

A PEO streamlines human resources processes and procedures. It is a supportive resource for your HR efforts, like payroll and benefits administration. In general, a PEO can offer efficiency and compliance with tax regulations. However, the ultimate responsibility for a company's workforce resides with the company itself.

An EOR handles HR activities like recruiting and hiring employees in a foreign country. The EOR assumes responsibility for employment contracts and agreements where applicable. Like a PEO, an EOR assumes responsibility for complying with tax regulations.

Company Size, Scale, and Scope

According to a recent NAPEO survey, the PEO industry’s 173,000 clients represent 15.3 percent of all employers with 10 to 99 employees.

Businesses seeking assistance with employment-related functions often find working with a PEO to be both efficient and cost-effective. This relationship helps lessen employee expenses while relieving a business of tending to cost- and labor-intensive administrative tasks.

No minimum number of employees is required when working in partnership with an EOR. Many EORs can facilitate effective hiring and onboarding across multiple countries and can support compliance with local labor rules and regulations. This allows clients looking to expand internationally to avoid expending resources on creating a foreign entity or subsidiary.

Costs

PEOs generally charge a flat fee per employee per month or an agreed-upon percentage of the monthly payroll. They often generate up-front and long-term expenses for companies that engage their services, including pricing components for workers’ compensation coverage and employee benefits, in addition to administrative costs. There may also be a one-time preliminary fee for establishing these services.

EORs generally come with a comparable fee structure but may be less expensive than PEOs on a long-range basis, depending on certain factors. Employee benefits and insurance plans are covered by the EOR, resulting in fewer funds needed from the business that works with them.

PEO vs. EOR: Which Is Right for You?

Businesses searching for expert HR assistance, whether through a PEO or EOR, should consider each feature.

If you choose a PEO, ask questions like these to help guide your decision:

• Is the PEO accredited by ESAC (Employer Services Assurance Corporation) or certified by the IRS? Not all are.
• What PEO-related costs are involved?
• What services are offered?
• Will it be possible to scale up as my business grows?
• How up to date is the HR technology provided by the PEO?
• Can we smoothly integrate PEO services with our existing HR policies?
• Are employee training programs part of what's offered?

If you determine an EOR is your best option (perhaps you may need to hire employees in a foreign country), keep these questions in mind:

• What costs are involved?
• What specific services does the EOR offer?
• Where does the EOR operate (i.e., countries)?
• Are benefits packages offered to employees?
• What level of support can we expect from global employees?
• What is the extent of the EOR's compliance and risk management services?

Benefits of a PEO

Determining the potential value of a PEO for your business comes down to a close look at its potential service-level functions:

• By providing comprehensive administrative support, benefits and payroll administration, and helping with compliance, workplace safety, and technology, PEOs allow business owners more time to focus on strategic planning and future growth initiatives
• PEOs may be well-positioned to negotiate favorable insurance rates and benefits
• Many PEOs can help with a full range of employee relations issues (recruitment and termination, crafting job descriptions, training and developing, producing employee handbooks, offering staffing strategies, and expert performance management)

For many companies, the desired result of working with a PEO is improved employee turnover and retention.

Depending upon the PEO service agreement, it's also essential to consider these other potential criteria:

• A business undergoing rapid growth (prompting an urgent need for new hires) can see increased charges from the PEO
• To work with a PEO, a business must have a business registration for wherever their workforce lives, thus influencing any plans to recruit employees beyond the company's state or country
• PEOs will likely vet business operations and finances to determine if the business is in good financial shape without any pending litigation or allegations of wrongdoing

The 2024 Priorities for Business Leaders guide from Paychex provides insights into the plans, priorities, and problem-solving solutions of business and HR leaders as they eye growth in 2024.

Benefits of an EOR

• EORs, acting as legal entities, may facilitate expansion into foreign markets
• An EOR's knowledge of local job conditions in foreign markets enables them to make proper hires for their business clients
• EORs handle compliance with global employment laws
• Fewer legal costs are involved when the EOR assumes responsibility for compliance with a foreign country

Potential EOR clients should also be aware of the various criteria that may govern EOR service agreements:

• Depending on a foreign country's labor laws, EORs may be obliged to enforce restrictions on employee tenure and other components related to employee contracts
• Conducting business through an EOR may result in operational constraints for the business client (depending on a foreign country's labor laws), thus negatively affecting how resources are used and overall project management

What Is the Difference Between a Payroll Service Provider and an EOR?

Third-party payroll services help automate their client's payroll process and may help with HR services and taxes. The payroll company does not recruit new hires when the client business opens offices in other countries. An EOR assumes responsibility for a broad spectrum of HR and payroll issues in countries where the client business has an ongoing employee presence.

Find the Right HR Solution for Your Business

Deciding between PEO and EOR may be among the most crucial actions to prepare your business for long-term growth. While both third-party companies offer valuable assistance, knowing the benefits and distinctions between EOR and PEO can help guide your final decision.

Enlisting the services of a qualified HR partner like Paychex can make all the difference between "running in place" or moving forward with a stronger workforce in 2024.